Assessing the Millennium Challenge Corporation

In 2002, President Bush proposed a new initiative, Millennium Challenge Account (MCA), to provide significant foreign aid to developing countries that make sound investments in health and education, pursue free trade and open markets, and adopt anti-corruption initiatives. Signed into law in January 2004, the MCA will be administered by the Millennium Challenge Corporation (MCC), which is governed by a board of directors chaired by Secretary of State Colin Powell. Funding for the initiative is slated to rise from $1 billion in 2004 to $5 billion a year starting in FY06, roughly a 50% increase over current U.S. core development assistance. At a meeting co-hosted by the Environmental Change and Security Project and the Project on America and the Global Economy, Lael Brainard, Nigel Purvis, and Steven Radelet, authors of The Other War: Global Poverty and the Millennium Challenge Account, outlined the initiative's principles and the challenges facing the newly-formed corporation. ECSP Senior Public Policy Scholar John Sewell served as discussant.

Africa will be a loser

"We're all a little breathless to see the first grant," said Lael Brainard of The Brookings Institution, noting that the MCA had generated a lot of curiosity in the two years since it was announced. Dr. Brainard posed a set of unanswered questions about the structure of the program's grants: which countries will qualify? Will grants be designed by people in the field or imposed from D.C.? What sectors will they cover and how flexible will they be? What benchmarks would be used to monitor and evaluate performance? How will the board be constituted and held accountable?

"Africa will be a loser, depending on how you look at it," asserted Brainard; although the qualification process moves in the right direction, she fears that the actual set of eligible countries won't include the neediest. Although Africa is critically in need of development aid, only 3 of its 41 poorest countries will initially qualify for assistance if the eligibility criteria are applied narrowly. Despite the addition of the MCA, she estimates that the United States will cut real development assistance by 22 percent by 2009, she warned that "those initiatives that have a lot of profile and a lot of public salience will get the attention and the funding they need, while these other initiatives, which continue to be absolutely critical, are going to wither on the vine."

The greater attention paid to the MCC, compared to existing foreign aid programs, is "stunning," according to Brainard, who explained that "we are seeing a transformation of foreign assistance, mostly by default, not design." Not only is "no single entity responsible for foreign assistance," the MCA does not encourage coordinating with other donors. "We don't have a strategy that embraces international institutions or leveraging our money through coordination." Brainard recommends that "we put equal emphasis on greater coherence within the U.S. government, with international organizations, and complementary programs like trade, debt relief, and investment."

A new energy

Noting a "new energy in the last few weeks," Steve Radelet of the Center for Global Development observed that the MCC was "finally beginning to move." Staff—albeit only a few—have been hired, and they expect to announce eligible countries next May and sign compacts with the grantees in July. Radelet highlighted four key areas of the MCA:

· Country selectivity: Based on the principle that aid is most effective in countries with good policies and good governance, the MCC will use 16 publicly available indicators (along with some qualitative guidelines required by Congress), to determine which countries are eligible for grants. The indicators are described in the MCC's methodology report.

· Country ownership: Countries are expected to set their own priorities and design their own programs. Radelet observed that this is "fundamentally different from the way most aid agencies work."

· Scaling up: President Bush has requested $5 billion by 2006; some countries could receive grants equal to 5-6 percent of their gross domestic product. However, "if anybody thinks we're going to get $5 billion for this program, I have a bridge I'd like to sell them," joked Radelet, who guessed that at least $2.5-3 billion will probably be distributed among 15-25 countries, resulting in grants that are still "quite large and quite significant."

· Results-based management: To continue to receive funding, countries must meet performance benchmarks.

Calling it "a pretty amazing thing," Radelet praised the MCC's transparent eligibility system, which, by using publicly available data in a public system, "depoliticizes our allocation of foreign aid" for the first time. He warns, however, that there has been far too little discussion about the grants themselves: who will be able to apply—governments, NGOs, the private sector? What kinds of programs will be eligible? He recommends that the MCC follow the inclusive model of the Global Fund for AIDS, Tuberculosis, and Malaria: "I'm a believer in giving lots of leeway to countries."

Warning that "it would be huge mistake if [the MCC] is all we did," Radelet recommended that the United States rethink foreign assistance, observing that "our systems and institutions are Cold War institutions." He proposed that a single cabinet-level organization coordinate aid activities, customize delivery methods for different countries, and coordinate with international organizations. Blaming Haiti's implosion on "disengagement by the administration," Radelet called on the United States to recognize that we should not only be "fighting global poverty because it is the right thing to do, but it is also in our national interest."

A broad brush

Nigel Purvis of the Brookings Institution applauded the MCA as an "extraordinarily clean and simple and coherent" law. Purvis commended Congress for using "a broad brush" to establish "clear goals and clear mechanisms, and to empower the executive branch to spend the funds for the achievement of those goals."
However, it could be threatened by its lack of clarity on certain points. For example, earmarking funds for specific projects would be "completely incongruous with the way that the program will be implemented," according to Purvis, but the MCC hasn't described how it would prevent this. Also, without the tight oversight imposed on current foreign assistance programs, there is "bound to be the foreign assistance equivalent of the $600 toilet or $3,000 Pentagon hammer." Despite these problems, Purvis called the MCA a "real opportunity for U.S. foreign assistance diplomacy."

Purvis acknowledged that most conservative members of the president's party did not undergo a "significant conversion" on foreign aid, but voted for the legislation to support Bush, which could make the MCA vulnerable under another administration. Listing the large number of different aid programs, Purvis asserted that "fragmentation of foreign aid has a significant political consequence. The incoherence and complexity is perhaps why the U.S. is at the bottom of the pack among donors in providing foreign aid." Paradoxically, "we are able to increase political support by focusing on single issues: by bringing the evangelical religious conservative community with the liberal development community together we were able to create a majority for significant new funding for HIV/AIDS, but it was not integrated into our broader development strategy and not part of a coherent whole."

Finally, Purvis pointed out that the MCA, while originally "silent on environmental issues," was revised by Congress to incorporate explicit criteria for managing natural resources, and Purvis expects that the MCC will encourage environmental grant-making and subject programs to environmental reviews "to ensure that the United States is not unwittingly producing negative environmental consequences." However, the environmental review process is currently unclear.

Not the only donor in town

While John Sewell, a senior public policy scholar at the Wilson Center, deemed the MCA "the first real innovation in U.S. development programs in many years," he bemoaned the missed opportunity to incorporate the Millennium Development Goals and fighting poverty ("the preeminent ethical issue of our time") into the legislation. "The MCA is not the only donor in town," Sewell said, questioning how this program would work with the World Bank and the International Monetary Fund , and what would the United States do if it did not agree with other major donors or a recipient country's priorities?

Sewell asserted that the administration's national security strategy seeks to expand the circle of established market economies:

Democratic states don't go to war with one another; market economies eventually lead to democratic political systems and provide the resources to deal with other problems; they tend to trade with one another and experience less conflict…[but] there are not that large a number of established market democracies. In reality, the process of democratization and marketization are fraught with conflict, violence, inequities, and backsliding….The challenge, therefore, is that as many countries as possible become established market democracies in as relatively a short period of a time as possible. If that's not done, both American interests and American security are going to be adversely affected.

Big money

Following the talk, a member of the audience wondered where eligible countries would find the capacity "to get the biggest bang" out of their proposals. Lael Brainard suggested that a country's "first stop shopping will be USAID" to consult with the mission officers, but at this point, "nobody knows what a good proposal would look like," as MCC is just beginning to put together guidelines, and in the next month or two, hopes to send teams to each country to talk to people on the ground about proposals.

"What if, as an example, a country says that our greatest hurdle to economic growth is lack of access to family planning, so they submit a proposal that deals with that?" asked another audience member, noting that family planning is not a high priority for this administration. "Ten second answer: if it has abstinence in it, it will sail right through," replied Brainard. Nigel Purvis noted that the MCC would use a competitive process like a foundation, so some degree of subjectivity would be inevitable. "They'd be crazy to submit a proposal on family planning in the current political environment, but fortunately for most of these countries there are lots of other issues" to focus on, added Steven Radelet.

In response to an inquiry about government contracts, Radelet praised the program: "There is no earmarking or tied aid in this program, which is a huge victory." As MCC currently envisions having a staff of only 100 people, without field workers and or a contracting office, it would be quite difficult to contract directly with any businesses or organizations. Radelet asserted that MCC's intent was to sign only "one compact or contract with the recipient country," and leave the subcontracting to entities on the ground.

Another attendee asked about the current budget shortfall's impact on the MCA. Brainard warned that it was "almost certain" that under current resource constraints, the program would not have the impact it sought, due to the "desire to make sure that loads of countries that we like for lots of different reasons get a little piece of this." Radelet agreed, adding that in a few years, the MCC may favor programs already underway over new proposals. The MCC could also revamp the qualification standards to restrict the number of new countries that qualify: "Early entrants are going to have big edge," he noted.

Finally, an audience member questioned why the speakers believed that "big money is going to make the difference." Purvis explained that our current system of earmarking large grants for certain countries produces little leverage, no real change, and not much goodwill because the recipients aren't held accountable for any results; he cites Pakistan and Egypt as examples. However, the MCC's large grants will be different, because "MCC decouples large flows from strategic partners and links them with actual policy results and reforms." Brainard agreed, saying that the MCA was about "really good investments, not big money," and would utilize local ownership and accountability to "get away from the notion of directing money based on geostrategic importance." Radelet noted that "Money matters; you cannot solve the HIV/AIDS crisis, you can't solve river blindness, you can't solve polio, you cannot get kids through primary school education without money… Big money has to be part of the big deal."

Drafted by Meaghan Parker and Ira Athale.